Masterminding Cash Flow Strategies in your Business

Hello my friend,

Business analysts report that poor management is the main reason for business failure. Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces.

Cash management helps to ensure that adequate levels of capital are available to a business for short-term needs such as inventory purchases. A good cash management program can significantly influence the efficiency of operations, which can also reduce overall costs. The goal of most cash management systems is to eliminate surprises related to cash by meeting the daily cash requirement at the lowest cost possible.

Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you expect to make over a given period of time, while cash is what you must have on hand to keep your business running. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash.

The cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.

Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects the accounts receivable. The cash conversion cycle measures the time between the outlay of cash and the cash recovery. The CCC cannot be observed directly in cash flows, which are affected by financing and investment activities as well; rather, the cycle refers to the time span between a firm's disbursing and collecting cash. Source - Investopedia.

 The formula for calculating CCC is as follows:


CCC = DIO + DSO - DPO


Days Inventory Outstanding (DIO) refers to the number of days it takes to sell an entire inventory. A smaller DIO is preferred. 

 Days Sales Outstanding (DSO) refers to the number of days needed to collect on sales, or accounts receivable. A smaller DSO is also preferred. 

 Days Payable Outstanding (DPO) refers to the company's payment of its own bills, or accounts payable. By maximizing this number, the company holds onto cash longer, increasing its investment potential. Thus, a longer DPO is preferred.

 By understanding and implementing this simple key metric into your business will enable you to maximise the cash flow in your business.

 Until next time, have a profitable day.
Peter Adams




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